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Tax-GDP Ratio

There is a rise in tax-GDP ratio from 5.9%in 1950-51 to 12.5% in 2007-08. This indicates the increasing revenues for the government.

Difference in ratio of revenue collection between developed and underdeveloped countries: - In under developed countries like India where the mass of population is poor,
the ratio of the revenue collection from direct taxes to that from indirect taxes cannot be as high as in the developed countries in the west. Agricultural income has been exempt from union income tax and the states are not inclined to levy it though they have statutory power to do so.

Problems due to Black Income: - India has a sizeable black income. According to estimates, black income was as large as 40 percent of GDP in 2000-02. Obviously, whole of this black income is concentrated in the hands of the richest that do not pay any tax on it. The government should muster courage to haul up this politically influential group of tax avoiders. Tax evasion is an explicit offence in most countries. In the process of tax evasion a person or an entity does not pay the tax that it is supposed to pay but seeks to use different routes in order to avoid the taxes that it has to legally pay.

Tax Rebate

Tax rebate refers to a benefit wherein there is a reduction from the tax to be paid by the tax paying entity. One can thus reduce the tax burden by claiming the rebates available under the different laws. In India tax rebates are more commonly understood with the fact that when one makes investments in certain avenues then a rebate equivalent to a certain percentage of the amount invested will be available for the investor. Take for example the investment in insurance policy for which benefits are available under government rule. An individual can claim a rebate at the rate of 5 % or 100 % as the case maybe and also depending upon the income bracket into which he falls for the amount invested into the policy and other specified routes up to the permissible limit of Rs. 1 lakh.

The Fiscal Challenge

If the deficit is too large a proportion of the GDP, and if the government finds itself increasingly incapable of repaying debt raised to cover excess of expenditure over income, then it is a cause for concern. Fiscal deficits can be a cause for concern if they lead to inflation, and displace private investment (see "crowding out"). By increasing non-productive expenditure, the government puts money in the hands of the public without increasing the output of the economy. As a result, demand goes up as people hold more cash, and there is no increase in supply, which results in inflation. However, this depends on whether the government prints money to pay, or merely borrows existing funds with banks to repay. In the latter case, the cost of government borrowing is higher interest rates, as both the public and the private sector compete for the limited resources of the banking sector.

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* Contributed by: -
Prof. M. Guruprasad is Senior Faculty for Economics, Finance and Research, with AICAR Business School Raigad / Mumbai. He has more than 15 years of experience in research and educating / training management students. He was research scholar with the University of Mumbai. Worked as Executive in the Marketing research industry. Also Conducted Workshops and Training programmes. He has published articles in various industry magazines, newspapers and has initiated many discussions on academics.